The recently passed Tax Reform Act of 2017 (TCJA ) included a potential tax break for investors. An investor may defer capital gains taxes on the sale of any opportunity zones asset. These taxes can potentially be deferred until December 31, 2026, or the date of a sale (whichever is earlier). As discussed below, this original capital gains tax is reduced over time, and if held long enough, new appreciation on the investment can be realized tax free.
An investor sells an asset and generates a capital gain. The capital gains from that investment must be reinvested within 180 days into a designated Opportunity Zone (OZ). An OZ is a specially designated census tract. Large parts of the U.S. are eligible for designation, including many commercial, industrial and residential areas.
If the investment is held, the capital gains liability on the original investment will be reduced by 10% after five years and by 15% after seven years. After 10 years, the new capital gains taxes generated from the opportunity fund investment are reduced to zero.
A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property). Governors (or the Mayor in the case of the District of Columbia) may designate 25 percent of their state’s low-income census tracts as qualified opportunity zones, subject to certification by the U.S. Secretary of the Treasury. Low-income census tracts are defined in Internal Revenue Code Section 45D(e). If the number of low-income census tracts in a state is less than 100, then a Governor may designate a total of 25 tracts. Qualified opportunity zone property includes any qualified opportunity zone business stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property. Only taxpayers who roll over capital gains of non-zone assets before December 31, 2026, will be able to take advantage of the special treatment under the provision.
We believe this is one of the most beneficial tax reforms in decades. Learn how CAS can help you potentially take advantage of this opportunity.